Category Archives: Investing Money

Always Think About Inflation

profit-loss-riskMy Thoughts About This: Inflation is one of those existential threats I always talk about with clients. But it’s like watching a car rust. You simply don’t notice it on a daily or monthly basis.

But the Oh MY God inflation that happened to the Weimer Republic in 1921-24 or perhaps more recently in Argentina, is enough to make you pay attention. However, I recall an understanding from college economics that some inflation is a good thing. It validates the idea behind the need for an economy to grow, as opposed to one that shrinks.

Meanwhile, in Russia, with the world watching Putin play strongman in Syria and with Turkey, the Russian economy is shrinking rapidly. It’s down about 4% so far this year and inflation right now is about 15% annually. It’s probably going to get worse.

Nov 20, 2015 By Rusty Vanneman

Inflation — and how to outpace it — should always be a top concern for investors. Over the last several years though, it really hasn’t.

Inflation, as defined by the Consumer Price Index, has been falling for about four years and has now essentially flat-lined, with 0% year-over-year changes. Other inflation measures, such as the Producer Price Index and import prices, have recently had negative year-over-year changes, and the Personal Consumption Expenditures Price Index (PCE) has lagged Federal Reserve targets for more than three years. No wonder investors aren’t all that worried.

Nonetheless, advisers and investors should remain vigilant. Investing really isn’t about beating benchmarks so much as meeting long-term objectives and liabilities. For long-term investing to be successful, long-term returns need to outpace inflation. For example, what good is getting a 4% return when inflation is 5% (which would be a -1% real return)? It’s better to have a 3% return when inflation is 1% (for a real return of +2%).

Inflation may be finally starting to return. Some measures of inflation are starting to perk up and there are indications of more inflationary upticks moving forward. Take the CPI. If we strip out food and energy (otherwise known as Core CPI), we see closer to 2% year-over-year growth — and the latest data is starting to move higher. In addition, the economy is witnessing rising house prices and wage growth. These are important clues.

Higher housing prices flow through not only to higher housing costs for homeowners, of course, but also eventually to non-homeowners as rents will start to increase. And as for wage growth, which does have a chicken and an egg relationship with inflation, it is definitely on an upswing.
How can investors fight inflation? There are several traditional ways.

One is to emphasize real assets, which derive their value from physical or tangible assets. They include commodities, natural resource stocks and real estate. These types of holdings typically perform better during inflationary periods. Another attractive feature of real assets is that they typically have low correlation with stocks and bonds.

In addition, another asset class that has tended to do well in inflationary environments is emerging market stocks. Given their traditional production/consumption of commodities, this connection has historically made sense.
Examples of emerging market ETFs:
• Emerging Markets:
o Vanguard FTSE Emerging Markets (VWO)
o Wisdom Tree Emerging Markets Equity Income (DEM)
o iShares Core Emerging Markets (IEMG)

What about fixed-income investing? Historically, when inflation is rising, so are interest rates. The best thing investors can do is shorten duration (i.e., decrease interest-rate sensitivity by emphasizing shorter-term bonds over longer-term bonds) and be tactical by emphasizing certain fixed-income sectors such as high-yield corporate bonds (since it’s easier for companies to pay back debt with inflated prices) and inflation-linked bonds (which are linked to actual inflation and should outperform nominal bonds).

Examples of ETFs in fixed income that should help performance in an inflationary environment:
• Short maturity:
o PIMCO Enhanced Short Maturity (MINT)
o iShares Floating Rate Bond (FLOT)
o Powershares Senior Loan Portfolio (BKLN)
• High yield:
o PIMCO 0-5 Year High Yield Corporate (HYS)
o iShares iBoxx High Yield Corporate (HYG)
• Inflation-linked Bonds:
o PIMCO 1-5 Year U.S. TIPS Index (STPZ)
o iShares TIPS Bond ETF (TIP)

In the end, long-term investors need to remain concerned about real returns. Preserving the ability to pay future inflation-adjusted liabilities remains tantamount to achieving long-term financial success.

Rusty Vanneman is chief investment officer at CLS Investments.

Investors Avoiding Both Stocks And Bonds

080519_USEconomy1My Thoughts: Many of us are concerned about our investments. We don’t want our money under the mattress; we don’t want it all in money markets; we know bonds are going to get hammered when the Fed decides to start raising interest rates; and we know that over the past three months, the stock market has gyrated wildly, with a mostly downward trend.

Unfortunately, this background article won’t help you very much. But it’s not too long.

By Conrad de Aenlle on Nov 5, 2015

What do fund flows tell us about investor behavior before, during and after the third-quarter dive in stocks and the direction of markets from here? Even though raw numbers on money moving in and out of funds should be reassuringly concrete, they leave a lot to interpretation.

The trepidation displayed by the stock market may have begun in mid-August and reached a crescendo soon after, but Louise Yamada, a highly regarded technical analyst who heads Louise Yamada Technical Research Advisors, contends that distress had been building throughout the third quarter. In the September edition of her monthly newsletter, Technical Perspectives, she pointed to data from the Investment Company Institute, a fund industry group, showing that owners of stock and bond mutual funds alike made net withdrawals in July and the first three weeks of August.

“Their observation is that usually stock withdrawals move into bond funds,” Yamada wrote, “but withdrawals from both [are] a sign of nervous investors. This pattern has not been seen since the fall of 2008, a statistic worth noting.”

But a lot has changed in the business since then. Mutual funds are no longer the only game in town, or at least the one that the great majority of investors play. Exchange-traded funds get a far bigger piece of the action today than just a few years ago, and Todd Rosenbluth, director of fund research at S&P Capital IQ, noted in a recent report that as money was leaving mutual funds of all sorts in and around the August swoon, it was being soaked up by ETFs.

During the two weeks through Sept. 2, a period that included the worst of the stock market’s decline and a big rebound, about $1.1 billion more was yanked from diversified domestic stock mutual funds than was put in, Rosenbluth said, citing Lipper data.

ETF flows tracked market action more closely. During the first of those two weeks, a net $5 billion came out of diversified stock ETFs, and the following week a net $7.8 billion was added to them. As for bond funds, mutual funds saw net outflows of about $2.5 billion during the two weeks, while ETFs had twice as much in inflows.

There probably wasn’t much overlap between the buyers and sellers of mutual funds and of ETFs during the market upheaval. In a conversation about his report, Rosenbluth said that mom-and-pop investors were probably doing the bulk of mutual fund dealing, while institutions were the main force behind the ETF flows.

The net effect, in his view, is an acceleration of the longstanding trend away from mutual funds and toward ETFs, as the market decline emphasized an edge — namely lower costs and correspondingly higher returns — that ETFs have over mutual funds, just when investors were looking for any edge they could get.

“I think we have seen an ongoing shift to passive products that the correction has amplified,” he said. “People don’t want to pay up to lose money.”

That may explain the preference for ETFs, but a look at fund flows through August and September suggests that the trend that Yamada inferred from mutual-fund flows and found worrisome — the shunning of both stocks and bonds before the plunge — may be lingering. Perhaps more ominous, the tendency exists even when ETFs are added into the mix.

Flows into domestic stock ETFs in September, about $7 billion, were just enough to negate the outflows from stock mutual funds, according to Morningstar, although outflows from stock mutual funds in August were double the flows into ETFs. As for bond portfolios, it was no contest. Over the two months, three times as much money departed mutual funds as entered ETFs.

Morningstar found six months over the last decade when investors had net withdrawals from stock mutual funds and ETFs combined and from bond funds, too, with August being the sixth. Two of the other five, August 2013 and June 2006, coincided with minor blips in long bull markets.

The other three — June 2015, August 2011 and October 2008, the latter period being the one Yamada alluded to — occurred just before or in the middle of corrections or bear markets. Anyone who saw fund investors’ none-of-the-above attitude as a contrarian “buy” signal for stocks turned out to have jumped in too early.

Buyers who jumped into stocks at the start of October enjoyed an excellent month that could be the start of a long rally. But if the history of those three months repeats, it could turn out to be the calm between two storms.

Bad News Is Good News, Once Again

My Comments: The markets seem as though they are being run by the Kardashians; drama, reversals, intrigue, chaos, take your pick. We watch because we have to, given that for many of us, our future financial freedom is in the balance.

November 06, 2015 by Scott Minerd

The mantra now is that bad news may turn out to be good news for the markets. Over the past couple of weeks, policymakers around the world have indicated that should any kind of negative event roil the markets, central bankers are prepared to take some form of action or, in the case of the Federal Reserve, non-action. In Europe, European Central Bank President Mario Draghi hinted strongly that additional monetary policy easing is on the way as inflation remains well below the ECB’s 2 percent target and the growth outlook remains uncertain. In Japan, the central bank revised down inflation and growth forecasts, and signaled a willingness to expand its quantitative easing program further. In the United States, the Federal Reserve is keen to begin raising rates in December, but there is no assurance it will because the decision will be data dependent.

The Federal Open Market Committee’s resolution to remain on hold at its September meeting due to volatility emanating from China confirmed that global macroeconomic issues and market volatility can play a significant role in determining when policy tightening finally commences. All this goes to say that any bad news or setback in the global economy is likely to be met with a policy decision that will be supportive for credit and equity markets; therefore, at this point, I see limited downside for risk assets between now and year end. Put another way, a December Fed hike should be taken as a sign that the Fed is sufficiently comfortable with the strength of the economy and the near-term outlook, which should be good news for investors. Given the October employment report, December liftoff has become a virtual certainty unless there is some catastrophic event between now and then.

As for the fundamentals of the economy, in the United States, the data look encouraging. Underlying real GDP growth was actually stronger than the 1.5 percent preliminary estimate for the third quarter would suggest. This is because the U.S. was due for an inventory correction, and declining inventory investment shaved 1.4 percentage points off the headline growth figure. Consumer spending, which accounts for about two-thirds of U.S. demand, rose by 3.2 percent, indicating that consumer spending is strong heading into the holiday shopping season. Robust equity returns in October—the largest monthly gains in four years—also bode well for Christmas sales.

It would be premature to open the champagne just yet. Slowing emerging market growth continues to weigh upon economic growth around the world, particularly in Europe. Meanwhile, the New York Stock Exchange Accumulated Advance/Decline Line, or market breadth, has failed to make new highs, or at least return to old highs, which would confirm sustainability of the current equity market rally. This is okay for the moment, because equities have yet to quite reach their old highs either—the market remains a stone’s throw away from its peak in May—but breadth leads the market, and over the coming months investors should keep a close eye on it.

While it is always prudent to be mindful of potential headwinds, the bottom line is that policymakers have made it very clear that their tolerance for sharp declines in risk assets is virtually nonexistent. They are prepared to take action (or inaction) as necessary.

Against this backdrop, I do not see significant risk to my forecast that the S&P could climb to a high of 2,175 in the next few months. Given policymaker commitment to support risk assets, it is likely that the rebound that has been underway in credit and equity prices will continue to endure over the coming months, regardless of bad news or concerns about slowing global growth.

Crude Oil Supplies Are Enormous

oil productionMy Comments: If you pay for the gas you use in your car, these are good days. If your life depends on a job in the oil extraction industry, no so good. You can argue the merits, or lack of merits, of fracking, but as the worlds largest consumer of oil, we’re increasingly unaffected by the global supply chain. As we slowly move toward electric or natural gas transportation, this trend will continue. Invest wisely!

Oct. 26, 2015 Andrew Hecht


Crude oil continued lower this past week as the market rejected prices above the $50 level on active month NYMEX crude oil futures. With both WTI and Brent now comfortably below $50 and prospects for commodities looking shaky at this point, these markets could be in for more losses in the sessions ahead. Technical action points lower in crude, as momentum is certainly negative. Fundamentals are also negative from both a macro and micro economic perspective.

Huge inventories weigh on price

These days, the world is awash in crude oil. In the United States, the Energy Information Administration reported last week on October 21 that crude oil inventories rose by 8 million barrels for the week ending on October 16, bringing total stockpiles to 476.6 million barrels. The prior week inventories rose by 7.6 million barrels. These are the highest inventory levels since April 2015. The stockpiles of U.S. crude oil rose for the fourth consecutive week. Over recent weeks, there have been some massive builds in U.S. crude inventories.

Brent crude has also been weak as OPEC members continue to pump record amounts of the energy commodity. Last week markets received two signs of a continuation of the global economic weakness that weighs on the demand side of the fundamental equation. ECB President Mario Draghi said on Thursday that European interest rates are likely to move lower in December and signaled that quantitative easing could continue beyond the September 2016 deadline for the program. While lower interest rates are not necessarily bearish for commodity prices, including oil, economic lethargy is certainly a negative factor for demand.

On Friday, the Chinese government cut domestic interest rates for the sixth time in 2015. The government continues to combat stagnant growth in the Asian nation with a number of economic tools including monetary policy. It is likely that economic numbers due out in the near future will show continued pressure on the Chinese economy. Economic weakness in China is negative for crude oil demand as the Chinese are the world’s largest consumers of commodities by virtue of the size of their population. Recent data has pointed to China transitioning from a manufacturing-based economy to a consumer-based economy.

OPEC members and the Russians are continuing to pump and sell as much crude as possible onto the international market, which is yet another negative factor for price. Last week, the final approval of the deal with Iran that will ease sanctions just means more crude oil finding its way to the market.

Meanwhile, as inventories grow in the United States, there are signs that production will fall soon.

Brent-WTI moving back to historical norms

On Friday, October 23, Baker Hughes (NYSE:BHI) report that rig counts in the oil patch fell by another rig over the past week, bringing the total number in operation to 594. Last year at this time, the total rig count stood at 1,595. This means that U.S. production will eventually fall below the 9 million barrel per day level. The EIA said in September that the agency expects that daily U.S. production will fall to 8.8 million barrels per day in 2016. Falling rig counts is the reason. With OPEC production high and U.S. production falling, eventually, this could mean that the long-standing premium for Brent crude over West Texas Intermediate could soon become a thing of the past. In fact, prior to the Arab Spring in 2010 that took the Brent premium to over $20 above WTI, the latter traded at a premium to Brent for a majority of the time.

The Brent-WTI spread closed last Friday at $3.39 per barrel premium for the Brent on December futures. The spread closed at $3.20 on January futures contracts. Recently the spread traded down to around the $2.50 level, but increasing U.S. inventories over recent weeks has put additional pressure on WTI. However, the trend in this spread is certainly lower and given the continuing flow of oil out of the Middle East and Russia, we could soon see this spread return to a premium structure for the U.S. crude.

There is always a chance of big volatility in the Brent-WTI spread, as the political premium in crude tends to show up in the price of Brent. Brent is the benchmark pricing mechanism for Middle Eastern, African and European crudes. Meanwhile, as the price of crude oil moved lower last week, one aspect of market structure, processing spreads, showed some signs of life.

Signs of life in refining spreads

Crack spreads have been moving lower over recent weeks. We are in a limbo time of the year for oil demand as driving season ended with summer and heating oil season is still ahead. Refinery utilization stands at around 86% due to the slowdown in operations at the start of the fall maintenance season.

Stockpiles of gasoline and distillates have moved lower according to the latest data. Gasoline stocks were down for the first week in six weeks as demand strength was stronger than a rise in imports and production. Analysts expected a 1.5 million decrease in stocks and the number came in at a 2.26 million barrel fall. Distillate (heating oil and diesel) stocks also fell by 1.52 million barrels beating estimates for a 600,000 barrel draw. Despite the draw in stocks, inventories of gasoline and distillates remain well supplied at 7.6% and 18.5% above last year’s levels respectively at this time.

The better-than-expected news led December NYMEX cracks spreads to recover from very low levels.

In January 2015, crack spreads started moving higher, which eventually led to a bounce in the price of raw crude oil in March. It is too early to tell if the current rally in processing spreads is for real, but action late last week is certainly not overly bearish for the near term. Meanwhile, recent action in term structure is bearish.

Term structure and the dollar says the upside is limited

One of the best tools for monitoring the real-time impact of supply and demand in the world of commodities is term structure or the forward curve. Last week, crude oil term structure told us that prices may fall for oversupply reasons as the contango widened.

The December 2015-December 2016 NYMEX crude oil spread closed the week at $6.06 on Friday, October 23. This amounts to a contango of 13.6% – up from $3.85 or 7.7% on October 8 when crude oil was on its way to just over $50. The Brent December 2015-December 2016 spread closed on Friday at $6.94 or a contango of 14.46%.

The Brent contango is higher than the NYMEX contango because of expectations of increases of output from Iran, however, both spreads have widened as inventories grow around the world. This is clearly a negative signal for price right now.

While the purpose of interest rate cuts around the world is to stimulate economies, the result of those actions was an explosion in the value of the U.S. dollar late last week.

The U.S. currency has moved 3.6% higher since October 15, which is a huge move for a currency. The dollar is the reserve currency of the world and the pricing mechanism for commodities. There is a strong negative correlation between commodity prices and the dollar. The rise in the dollar is an offset to the effort to stimulate economies, and the currency looks like it is breaking out to the upside on a technical basis. This could mean more pressure ahead for commodity prices in general, including for crude oil.

December 4 is the target date

At this juncture, the price of crude oil looks like it has more room on the downside given the current state of market structure and momentum. However, the one bright spot last week was a shift in product inventories and a rise in crack spreads from low levels.

The truth about crude oil prices is that while fundamentals and technicals still favor downside price action, all that can change as we come closer to the December 4 biannual meeting of OPEC, the oil cartel. Last year OPEC said to the world, let it fall. The powerful producers in the cartel stated that they did not care if the price of oil fell; in fact, they welcomed a price that would curtail U.S. production from shale and build future market share for themselves.

Now, one year later, the cartel will meet again with many of its members suffering economic hardship and widespread cheating going on as members sell above the quota levels. The cartel has looked the other way as the production ceiling of 30 million barrels per day has been ignored and current production is running over 1.5 million barrels higher. That number is likely to increase now that sanctions on Iran have eased.

As one of the most political commodities in the world, any one of a number of events can turn the price of crude oil on a dime. I expect increased volatility as we get closer to the OPEC meeting. The high odds play is that the cartel will not change policy and that they will remain on the same path in an effort to hand out more pain in the U.S. oil patch. That opens up the potential of a real price spike if they surprise the market with a production cut. While crude oil is likely to continue to drift lower, uncertainty surrounding the December 4 get together will prevent it from making new lows below $37.75 per barrel basis the active month NYMEX futures contract.

Keep your eyes on crude oil market structure, particularly processing spreads and the forward curve in the weeks ahead. These spreads could yield important clues as to short- and medium-term direction for the energy commodity. For a handle on the longer-term prospects, we will have to wait for the word from OPEC. I have prepared a video on my website, which augments this article and provides a more in-depth, detailed analysis on the current state of markets to illustrate and highlight the real value implications and opportunities available.

More Market Mayhem On Its’ Way

My Comments: History does typically repeat itself. Whether its human frailty or the laws of physics, the past is usually a glimpse into the future. Cries of ‘this time it’s different’ usually prove to be false. It’s not what happens that has a critical effect on your financial future, it’s how you manage the inevitable. I’ve been at this for almost 40 years now, and while I’m far from perfect, there are ways to mitigate the risk.

26 Sep 2015 Richard Dyson

Earthquakes and volcanoes rarely strike once only to vanish. A number of smaller episodes precede and follow the main event.

The same appears true of market routs, where a series of dramatic falls cluster within a period of several weeks, or more often months, sometimes signalling an entire change in the market’s direction.

Black vertical lines in the chart, above, show the number of days per month in which the FTSE 100 index has fallen by more than 3% – from opening to close – in the past 20 years.

While falls of that magnitude often capture front-page headlines, they are relatively uncommon.

If all such falls over the past two decades were spread out evenly, they would occur on average every 78 trading days, or once a quarter, according to broker AJ Bell which processed the data for Telegraph Money.

But they rarely occur in isolation.

On only 12 occasions since 1995 has there been just a single day within a calendar month where the market fell by more than 3%. Instead the bad days clump around wider market events, usually global in origin.

The first cluster of lines marks the crises in the late 1990s beginning in Thailand and spreading across Asia and from there to Western markets.

The two biggest concentrations of falls – including single months where there were six and seven days in which the FTSE fell by more than 3% – came in the desperate years of 2003 and 2009.

The first marked the final end of the protracted sell-off of the technology bubble. The 2009 cluster marked the trough at the end of the financial crisis.

By contrast the correction suffered since last month’s “Black Monday” (August 24) has been comparatively minor.

If the past patterns of the data are to be repeated, further days of sharp sell-offs are to be expected in coming weeks.

Russ Mould, investment director at AJ Bell, said: “If anything, the story here is the comparative absence of turmoil in the past 18 months up to August.”

He points out that downward market movements are more abrupt. This means days of 3% falls far outnumber those where the market gained 3% or more. “Markets tend to rise serenely and lose ground quickly, which again is what can make bear markets such a shock.”

Preparing for opportunities

With further falls likely, investors are eyeing sectors where the greatest value is likely to emerge – and building cash reserve in preparation.

Based on a number of measures of value including price to earnings ratio, yield, and “Cape” – the cyclically adjusted p/e – Telegraph Money identifies European and emerging markets as “prepare to buy” areas, with commercial property, bonds and gold as sectors to trim back as a way of raising cash ahead of future falls.

5 Reasons the Fed Shouldn’t Raise Rates

080519_USEconomy1My Comments: You’ve already read my comments about the significance of interest rates. They are going to start going up; when is the big unknown.

By Akin Oyedele, September 9, 2015

Larry Summers is convinced the Federal Reserve will make a huge mistake if it raises interest rates next week.

Two weeks ago, Summers wrote in the Financial Times that a rate hike risked “tipping some part of the financial system into crisis.”

And in a blog post on Wednesday, the economist, who withdrew as a candidate for chair of the Federal Reserve Board, a job now held by Janet Yellen, followed up on this thinking, giving five reasons his argument against a rate hike was even stronger than it used to be.

Summers’ main points are:

  • The stock market chaos two weeks ago tightened financial conditions and created the equivalent of 25 basis points of a hike (this is the amount by which most think the Fed will raise rates if it does this month).
  • Employment growth has slowed down, and commodity prices have fallen. The Atlanta Fed’s gross-domestic-product tracking model, which nailed first- and second-quarter growth, is forecasting only 1.5% growth in Q3.
  • The Fed has argued that low inflation is transitory. But inflation will most likely stay low, and the Fed’s preferred measure — personal consumption expenditures — is expected to be below the 2% target, according to market-based expectations.
  • It would be pointless, as some have suggested, for the Fed to raise its benchmark rate by 25 basis points and then say there will not be more hikes for some time. “If as some suggest a 25-BP increase won’t affect the economy much at all, what is the case for an increase?”
  • If the Fed does nothing, the “risks” are a rise in inflation and less volatility in markets. But there could be a “catastrophic error” if it tightens policy now. And according to Summers, the consensus views on the economy are understating its real risks.

At next week’s meeting, the Federal Open Market Committee will decide whether to raise its benchmark rate for the first time in nine years. But markets think it’s a remote possibility and are pricing in a 30% chance that the Fed will hike.

Summers joins the World Bank, the International Monetary Fund, and others in calling on the Fed to not raise rates just yet.

2 Phase Bear Markets

My Comments: This is a great overview that needs to be read and understood if you have money in the markets, especially retirement money. If you know how, you can find ways to make it grow when everyone around you is falling backwards. There is a link so you can see the great visuals and read all the writers comments.

Aug. 19, 2015 by Eric Parnell, CFA

• The specter has been rising that stocks may eventually break to the downside and threaten to enter into a new bear market.
• Stocks do not universally fall to the downside all at once, as the onset of a bear market tends to be more nuanced.
• Bear markets have two phases, which is a critical point for investors in positioning for whatever market environment may lie ahead.

The U.S. stock market has struggled to break out to new highs since late last year. And with the bull market already long by historical standards at a time when corporate earnings have stalled and monetary policy may soon be tightening, the specter has been rising that stocks may eventually break to the downside and threaten to enter into a new bear market. But if such an outcome were to come to pass, it is important to recognize that the market does not just simply fall to the downside all at once. Bear markets tend to be more nuanced. This includes the fact that they almost always have two phases. And this point is critical for investors seeking to position for any such future outcome.

The Two Phases Of A Bear Market – First Phase
Many investors have the notion that everything falls sharply to the downside all at once when stocks enter into a bear market. But history has shown that this is not the case. Instead, the onset of a bear market is often much more gradual. And this is true even if the initial catalyst that sparks the bear market is violent. This is due to the fact that investor psychology is something that tends to change only gradually over time, which is the key reason why so many investors only realize that they are trapped in a bear market when it is far too late to do anything about it. Such is the reason why bear markets typically have two phases.

The First Phase – 2000 to 2003 Bear Market

The first phase of a bear market is marked by a wide dispersion within the stock market itself. When a bear market first gets underway, it is frequently driven by a sector or industry that had previously been a key market leader. As a result, when the first major declines strike the market, the losses are often concentrated in this leading segment and investors view the initial pullbacks as long awaited buying opportunities that have finally arrived. As for the other segments of the market that were either moving steadily along or may have even been neglected, they often either continue in their previous trend or may even benefit, as capital rotates out of the leading sector or industry and into these more neutral to overlooked categories. As a result, many stock segments can continue to perform well for some time, even though a bear market is already underway.

Let’s reflect on the previous two major bear markets to illustrate how the first phase of a bear market typically plays out.

Back in the late 1990s, the technology sector was the extraordinary high flyer that propelled the broader market to dizzying heights. So when the bear market got underway in early 2000, it was the technology sector that was caught in the crosshairs of the decline. But what about the rest of the stock market during this time? What is often forgotten about the bear market at the turn of the millennium is how concentrated the losses were in the technology sector for much of the experience.

For the sake of illustration, let us first reflect on the nearly two-year period from March 24, 2000 when the S&P 500 Index (NYSEARCA:SPY) reached its bull market peak at the time through March 19, 2002.

With the bursting of the technology bubble, the once high-flying technology sector (NYSEARCA:XLK) was devastated during this time in losing -65% of its value. This helped drag the broader market, as measured by the S&P 500 Index, lower by -22% over this same time period.

Many segments of the market were actually performing well over this same time period. We’ll begin with the outright winners. Consider the performance of the consumer staples (NYSEARCA:XLP), financials (NYSEARCA:XLF), and utilities (NYSEARCA:XLU) sectors during this same time period. These three segments gained by +27%, +12% and +8% at a time when the technology sector in particular, and the broader market in general, were getting smashed. And these sectors were almost universally in positive territory for the first two years after the start of the bear market in March 2000.